Monday, January 08, 2007

There's not much room for growth in 2007 for valuations of financial services stocks, but Toronto-Dominion Bank and Manulife Financial Corp. are the pick of the bunch, according to UBS Investment Research analyst Jason Bilodeau.

TD is favoured because its strong domestic retail banking network is coupled with potential upside if performance can be improved at its problematic U.S.- based franchise, TD Banknorth.

TD shuffled management at the Portland, Me. subsidiary last month and announced that it is buying all the shares in the U.S. bank that it doesn't already own.

Mr. Bilodeau has a $77 target price on TD stock, compared to a closing price of $69.24 on Friday.

Meanwhile, insurance sector leader Manulife looks good because its capital strength "offers the prospect of additional investment, share buy-backs and dividend growth," Mr.Bilodeau said in a note last week.

For the banking and insurance industry as a whole, he said, interest rate cuts should favour continued strength in earnings, building on a record year in 2006. But, said Mr.Bilodeau, that's already "baked into" analysts' stock price valuations that are based on a multiple of estimated earnings.

"The prospect of further multiple expansion appears limited," said Mr.Bilodeau. "Multiple expansion accounted nearly 30% of the total price return the [financial services] group has provided over the past four years."

Overall, Mr.Bilodeau said he is neutral on shares of financial services companies at the start of the new year.